SPECIALISTS IN MANAGING
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Source: Catalyst Fund Managers & Bloomberg
Data is as at 31 December 2020
Benchmark: UBS Global Real Estate Investors Index USD to 31 March 2015; thereafter FTSE EPRA/NAREIT Developed Rental Index Total Return
Source: Catalyst Fund Managers & Bloomberg
Data is as at 31 December 2020
“Global Listed Property” – Combined: UBS then FTSE EPRA/NAREIT Developed Rental Index Total Return
“Global Bonds” – Citi World Global Bond Index (WGBI) All Maturities
“Global Equities” – MSCI Daily TR Gross World USD (TR)
“Global Cash” – Deutsche Bank 3M T-Bill Index
Source: Catalyst Fund Managers & Bloomberg
Data is as at 31 December 2020
Global Listed Property – Combined: UBS then FTSE EPRA NAREIT Developed Rental Index Total Return
Global Property Developers – Combined Developers Index: Global Developers Index TR USD (UREIUDDE) then FTSE EPRA NAREIT Developed non-rental Total Return Index (TENGNU)
The above graph illustrates the long-term performance of real estate companies focused on owning assets for their rental income streams, compared to real estate companies focused on generating earnings through developing and selling properties. Development permissions are often sought, and approvals granted, in prosperous periods where economic conditions and earnings growth are supportive of demand and therefore, development profits. However, in the time from conception to completion of a development, economic conditions may change such that properties are delivered at less favourable times in the cycle. Dedicated developers who develop through full-cycles will at times not achieve their targeted profit margins and may underestimate the appropriate risk premium needed to compensate for development risk.
Source: Catalyst Fund Managers & Bloomberg
Data is as at 31 December 2020
“Global Listed Property” – Combined: UBS then FTSE EPRA/NAREIT Developed Rental Index Total Return
“Global Bonds” – Citi World Global Bond Index (WGBI) All Maturities
“Global Equities” – MSCI Daily TR Gross World USD (TR)
Over the long-term, global listed real estate has been lowly correlated with global bonds and moderately correlated with global equities. Looking at correlations over the past 25 years, listed real estate correlation has been approximately 0.71 with equities, and approximately 0.31 with bonds. This evidences diversification benefits, which enable better risk-adjusted returns over long-term periods when included in a diversified portfolio.
The lockdowns have wreaked havoc on the economy. Central banks responded by flooding the markets with record amounts of liquidity. Trillions of dollars where injected via credit creation and directly paid to individuals and businesses. Since the trough in March, bonds and equities rallied to all-time highs, whilst most of the underlying economy has continued to perform poorly. Global listed real estate has underperformed both bonds and equities. Some real estate sectors, like Retail and Hotels, still face a very difficult and uncertain period ahead. Other real estate sectors like, Industrial, Lab Space, Manufactured Housing, and Single-Family Housing all performed well during the year and continue to have fundamental tailwinds.
Equity market valuations in most developed markets are at or near all-time highs, regardless of which measures one looks at. Fixed income, including government bonds, investment grade, and high yield, all trade at or near their lowest levels in history. Relative to fixed income and equity, the real estate sector looks very attractively priced on expected total return spreads. The estimated forward FAD (Funds Available for Distribution) yield for the sector is 4.40%. Based on our earnings estimates and market break-even inflation expectations, we expect the listed real estate sector to deliver at least 5% real return for buy and hold investors over the medium term. Within the real estate universe, more attractively priced opportunities exist in specific real estate sectors and stocks, providing opportunities for astute active managers.
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